Any discussion around foreign direct investment in New Zealand is guaranteed to provoke hearty debate.

More often than not, public uproar over the issue tends to be spurred on by media reports of an impending sale of New Zealand land to overseas interests. High profile disputes centre on local opposition to the sale of sensitive farmland; think Lochinver Station, the Crafar Farms or the Glenorchy campground.

This time however, the issue has been forced into the limelight following the new definition for what is officially meant by ‘overseas investor’.

Last week, the Overseas Investment Office announced that it would “now view trusts or custodian companies based overseas as an ‘overseas person’ when they are involved in holding shares in a company where more than 25% of the shareholding is owned by overseas entities”.

It is an announcement that has caused quite a commotion, with those on either side of the fence lobbing proverbial rocks at each other. Why? Because it represents a new hurdle for potential Kiwi investors in what is already overly burdensome investment regime for foreign investors. And it is a change that risks complicating commercial life for many Kiwi businesses.

Law firm Russell McVeagh blew the whistle on the announcement, stating the new definition is much wider than it used to be. The new interpretation of “overseas investor” may capture a large number of existing share investors and make it difficult for even Kiwi investors to be granted consent. This could mean that if a New Zealander is looking to buy shares in a New Zealand company that owns sensitive land here and is 25% or more foreign owned, the New Zealander will have to apply for consent under theOverseas Investment Act 2005.

This is a considerable regulatory hurdle for Kiwis who simply have shares held on their behalf by a custodian who happens to be an overseas person.

Russell McVeagh has acknowledged that the OIO has allowed some exemptions, however, these are only provided on a confidential basis. The unintended consequence of not publicly disclosing exemptions, according to the law firm, is that “a New Zealand-listed company, or even an investor in such a company, will not accurately be able to assess whether a transaction will require consent”.

New Zealand is hardly a market leader for foreign investment. Ironically, as a country built upon foreign capital, we are recognised as having one of the most onerous and restrictive investment screening regimes in the developed world. How much more dismal will private investment be if New Zealand begins to subject its own residents to the onerous requirements of the overseas investment legislation?

The New Zealand Initiative has found that New Zealand’s regime ties applicants up in red tape without any apparent change in material outcomes. What then is the point? Few, if any, could regard this as satisfactory. In addition, the stringent requirements of New Zealand’s regime surely have a chilling effect on the number of investor applications, although the extent of this overall is unobservable.

The noose on foreign investors is already too tight. The OIO’s change in definition may now mean many New Zealander investors too, are treated as foreign investors. Which means they will then presumably have to abide by the same requirements, and prove that they are of good character and possess strong business skills relevant to the prospective investment. They will also need to demonstrate that their investment will generate substantial and identifiable benefits (that would not occur otherwise) to New Zealand and New Zealanders. The new interpretation of what precisely is meant by ‘overseas investor’ may now mean Kiwi investors too will be subjected to these overly stringent prerequisites.

The announcement by the Overseas Investment Office is a step backwards. The only acceptable outcome to the announcement, according to Russell McVeagh, is that the OIO revert to the original interpretation when assessing overseas ownership of listed companies.

If New Zealand is to prosper to the best of its abilities, government must be intent on providing an environment that better facilitates private investment, innovation and risk-taking, by both local and foreign investors, not making it more difficult. This means a commitment to principles like neither subsidising nor discriminating against foreign investors compared to local investors, eliminating tedious regulatory hurdles, and protecting the freedom of Kiwis to sell their assets to whomever they wish.